Book Takeaways: The Lean Startup
January 27, 2024 • Books • Takeaways ⌇ Connect ↗
I can’t believe I am already 2 books into 2024, still on track to achieve reading 24 books this year as one of my personal goals. This one takeaways deep-dive is all about The Lean Startup by Eric Ries is the second one ticked off of my list. And oh boy was this an incredible book.
I only ever read summaries of The Lean Startup, but never took it seriously enough to pick up the physical book for some reason — a huge mistake in hindsight. It is literally the one book I think every founder should read. The clarity, approach and process Eric Ries packs into 290 pages are simply actionable wisdom I will apply to the next decisions and steps of my startup journey. And I genuinely think you should too. The frame of thinking coined more than 13 years ago is more relevant today than ever.
Trust me, you’ll want to dive into my key ideas from The Lean Startup.
Definitions
Normally I would not write a definitions section with terms. But since context is king and this book defined a movement from the ground up, I think it is an absolute necessity here as there is a lot to learn from the simple way Eric frames certain startup terms.
- “A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty.”
- “A startups job … (1) rigorously measure where it is right now by confronting the hard truths, and (2) devise experiments to learn how to move the real numbers closer to the ideal reflected in the business plan.”
- “Startup productivity is systematically finding out the right things to build.”
- “A startup’s runway is the number of pivots it can still make.”
- “MVP is the version of the product enabling a full feedback loop with the minimum amount of effort x least development time. Its goal is to test fundamental business hypothesis.”
- “Early adopters are the subset of customers who not only accept, but even prefer an 80% solution. They don’t need perfect.”
- “New customers come from the actions of past customers.”
- “Cohort analysis is the performance of each group of customers that comes into contact with the product independently.”
- “Vanity metrics do not improve the yield on each new cohort (e.g. not gross customers, but active users).”
- “Validated learning is how you avoid failure and successfully execute a plan that seemingly leads nowhere.”
- “A pivot is a structured course direction designed to test a new fundamental hypothesis about product, strategy and engine of growth.”
- “Planning is a tool that works in a long and stable operating history.”
- “Process is the only foundation upon which a great company culture can develop.”
Key ideas & takeaways
[01] Vision is your true north star, strategy is how you get there and product is the result. Your vision should remain unchanged. Your product should change frequently through optimisation.
[02] Your job as a founder is to find the cone between your vision and what customers would fall in love with.
[03] Every action a lean startup takes should be an experiment to achieve validated learning to uncover a sustainable business model around a set vision.
[04] Quantitative targets motivate and guide us to to lead lead qualitative inquiries with customers that cannot tell you what they want.
[05] Founders make 2x assumptions → growth hypothesis (test how new customers will discover your product) and value hypothesis (test whether a product really delivers the customer a benefit).
[06] IDEAS↘Build↗MVP↘Measure↗DATA↘Learn↗IDEAS → minimise the total time spent moving through the full feedback loop by planning in reverse and tracking resulting learning milestones.
[07] The most important outcome of the MVP is to answer: what is required to get customer to engage with the product and tell their friends about how awesome it is? Any additional work beyond what was required to start learning is an absolute waste. Remove any feature or process that doesn’t lead to learning.
[08] Ask yourself consistently: are you making your product better? How do you know?
[09] Customers > design & quality … customer do not care how much time something takes to build. They care if it serves their needs.
[10] Innovation accounting has 3x learning milestones: (1) Set a baseline → mini MVP to gather data, (2) Tune the engine → feedback loop to iterate towards the ideal, and (3) Set a direction → by deciding to pivot or persevere.
[11] Growth depends on 3x things: (1) the profitability of each customer, (2) the cost of acquiring new customers, and (3) the repeat purchase rate of existing customers.
[12] CPC growth hack → spend the minimum threshold on ads to improve your product based on 100 clicks/day.
[13] When to pivot? When you are not moving the drivers of your business model. This ≠ progress, hence you are stagnant.
[14] A successful pivot → new experiments you run are overall more productive that the experiments you were running before.
[15] A menu of pivot types designed to test a new fundamental hypothesis about the product, business model or engine of growth:
‣ Zoom-in pivot → a single feature becomes the whole product.
‣ Zoom-out pivot → more features must be added to make the product whole.
‣ Customer segment pivot → the product being built is solving a problem of a different target audience.
‣ Customer need pivot → the problem of a specific target audience is not being important enough to them.
‣ Platform pivot → a change in the purpose of the product from an app to a platform or vive versa.
‣ Business architecture pivot → a change between complex systems model (high margin:low volume) and volume operations model (low margin:high volume).
‣ Value capture pivot → an inherent change in the monetisation / revenue model of a business.
‣ Engine of growth pivot → a change between viral, stick or paid growth to become more profitable.
‣ Channel pivot → selling the same solution via a more effective channel to the same type of customer.
‣ Technology pivot → incremental improvements to the technological makeup of the product designed to appeal to and retain an existing customer base.
[16] Pivot or persevere meetings → decide to schedule pivot or persevere meetings to be clear on the direction you have achieved validated learnings in. Pace these on a bi-weekly basis. Then decide to do what you know. Pivots are all about repurposing what has been built and learned into a more positive direction.
[17] The 3 A’s of metrics: (1) Actionable → must demonstrate cause & effect, (2) Accessible → “metrics are people too” — use simple, concrete units to generate people-based reports, and (3) Auditable → we must ensure data is credible to all stakeholders.
[18] Work in small batches (hours, days or weeks) → deliver smaller pieces of a product step by step than the whole product (large batch size) all at once. Lean startups work in small batches to ship things quickly and learn as much as possible. It is ultimately more focused. Meaning: slow down and take on less at a time.
[19] Sustainable (long-term profit-oriented) are sourced from past customers via… word of mouth, as a side effect of product usage, through funded advertising or through repeat purchase or use.
[20] 3x engines of growth — all are powered by quantifiable feedback loops — focus on one at a time to avoid complexity - they will lead to product-market fit eventually:
➀ Sticky engine of growth → the product will grow if the rate of new customer acquisition exceeds the churn rate (attrition and churn rate must be carefully tracked). The rate of compounding determines growth speed: natural growth - churn rate. Find growth here by focusing on engaging existing customers, hence improving customer retention.
➁ Viral engine of growth → normal users spread the product automatically (these is not intentional evangelisation). The feedback loop here is the viral coefficient, which determines how many /10 customers refer a friend to use your product (the higher, the faster the spread). Example: hotmail signature.
➂ Paid engine of growth → to drive growth, either increase the revenue from each customer or lower the cost of acquiring a new customer. The feedback loop here is the CAC:LTV ratio which should ideally be at least 1:3. The lifetime value is found by deducting variable costs accrued by the customers lifetime, whereafter the remaining revenue can then be reinvested into paid growth.
[21] Compound growth (widening gap between initial & successive timeframe) > consistent growth (almost unvaried changes in growth rate over time). Larger rates of growth are not always better…
[22] To identify and solve problems by their root cause, ask 5x Why’s to determine the necessary amount of investment needed at each level (minor vs. larger symptoms determine how painful it all really is).
[23] Build → Measure → Learn … apply the scientific method-based feedback loop to build momentum — every setback is an opportunity to lean where you want to go. If you cannot fail, you cannot learn.
[24] Reframe the “build and they will come” fallacy into the “build and start learning” mindset.
Favorite quotes
“Only 5 percent of entrepreneurship is the big idea, the business model, the whiteboard strategising, and the splitting up of the spoils. The other 95 percent is the gritty work that is measured by innovation accounting: product prioritisation decisions, deciding which customers to target or listen to, and having the courage to subject a grand vision to constant testing and feedback. One decision stands out above all others as the most difficult, the most time-consuming, and the biggest source of waste for most startups. We all must face this fundamental test: deciding when to pivot and when to persevere.” — Eric Ries
“Mark explained,”Traditionally, the product manager says, ‘I just want this.’ In response, the engineer says, I’m going to build it.’ Instead, I try to push my team to first answer four questions: (1) Do consumers recognise that they have the problem you are trying to solve? (2) If there was a solution, would they buy it? (3) Would they buy it from us? (4) Can we build a solution for that problem? The common tendency of product development is to skip straight to the fourth question and build a solution before confirming that customers have the problem.” — Eric Ries
“Instead, we would recognise that speed and quality are allies in the pursuit of the customer’s long-term benefit. We would race to test our vision but not to abandon it. We would look to eliminate waste not to build quality castles in the sky but in the service of agility and breakthrough business results. We would respond to failures and setbacks with honesty and learning, not with recriminations and blame? More than that, we would shun the impulse to slow down, increase batch size, and indulge in the curse of prevention. Instead, we would achieve speed by bypassing the excess work that does not lead to learning. We would dedicate ourselves to the creation of new institutions with a long-term mission to build sustainable value and change the world for the better. Most of all, we would stop wasting people’s time.” — Eric Ries
Final thoughts
The intention of the lean startup → innovate and learn what is unknown.
The desired outcome of the lean startup → a new mindset: don’t assume to know.
If you are into reading or have a goal for 2024 as I do, let’s connect on Literal. You can follow me via @julianpaul — I track my current read and progress daily.
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Until next time.
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